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Angola: Sovereign credit risks remain elevated

Risk Outlook

Sovereign credit risks in Angola have been elevated since the 2014 crash in oil prices, and underscored by credit rating downgrades in 2017. The Angolan government has stated that it is committed to its debt obligations, but has announced that it intends to refinance with longer maturities. President João Lourenço’s pledge to review contracts signed by his predecessor and Angola’s precarious fiscal position pose contract alteration risks. However, expropriation risks remain low.

Security Environment

An armed separatist movement, the Front for the Liberation of the Enclave of Cabinda (FLEC), continues to wage a low-intensity conflict in the oil-rich Cabinda province. FLEC therefore poses a moderate kidnap risk for the province’s prominent oil and gas industry. In May 2016, men who claimed to belong to the movement boarded an offshore Chevron gas platform and threatened workers. A number of clashes between FLEC and Angolan government forces occurred in 2017, most recently in November when eight fatalities were reported.

Angola’s debt servicing burden has led to subsidy cuts, which, combined with currency devaluation and high inflation rates, will erode consumer purchasing power and therefore raise the risk of civil unrest. Although most Angolans have so far welcomed President João Lourenço’s extensive changes to government personnel, resentment of the ruling Movimento Popular de Libertação de Angola (MPLA) may re-emerge in urban centres, particularly Luanda, should he fall short of his pledges to combat corruption over the coming months. Demonstrations are mostly peaceful although the response of security forces can be heavy-handed. In February 2017, members of the police force allegedly beat protestors in Luanda who had gathered to call for the resignation of a minister.

Trading Environment

Angola’s macroeconomic fundamentals have been undermined in recent years by the low oil price environment, which has eroded foreign exchange reserves and raised sovereign debt risks. As a result, Standard & Poor’s downgraded Angola’s credit rating from B to B- in August 2017; Moody’s followed suit in October, lowering its rating from B1 to B2. Angola’s debt-to-GDP ratio stood at 61% in mid-2017, while foreign exchange reserves have more than halved since 2013 and currently stand at USD 14 billion.

The Angolan government responded with a series of measures in January 2018. These include proposals to buy back short-term debt and replace it with longer-term instruments, prioritising the settling of USD 4.9 billion in arrears owed to companies, and plans to issue a Eurobond. Angola also scrapped its currency peg against the dollar in January 2018, allowing the kwanza to depreciate by almost 20% by the first half of the month. Although the move will raise the cost of servicing foreign debt, it will help to alleviate fiscal imbalances and foreign exchange shortages.

The Angolan Ministry of Finance has stated that it is committed to meeting all debt obligations. However, default risk is heavily dependent on oil prices. While output is expected to increase this year, which will support stronger GDP growth of 1.6%, the country’s oil production is set to decline by over a third by 2023, and this will weigh on revenues.

Investment Environment

Angola’s need to diversify the economy away from oil is acute, and will present investment opportunities in other sectors such as mining and agriculture. Lourenço has also pledged to enact investor-friendly reforms. His government’s steps to increase competition in the telecoms sector and devalue the kwanza would likely be viewed favourably by the International Monetary Fund (IMF) should Angola seek an assistance package this year. An IMF package would be broadly positive for investors, as it would signal a commitment to controlling debt on a longer-term basis.

The risk of contract alteration is elevated under Lourenço. In January 2018 he promised to review all large contracts signed by his predecessor, José Eduardo dos Santos, that are considered prejudicial to the interests of Angola, such as the construction of the port of Barra do Dande. Having vowed to combat monopolies, Lourenço has sought to marginalise his predecessor’s family. In November 2017, he sacked dos Santos’s daughter, Isabel, as head of state oil company Sonangol.

Nonetheless, the president’s actions are likely to be tempered by his need to attract foreign investment into Angola. Should IMF assistance be forthcoming, it would reassure investors regarding the security of contracts. While the risk of expropriation is low, legal rulings may be subject to political interference. Foreign investors may face arbitrary rulings in commercial disputes, particularly where the other party is well-connected to the ruling MPLA.

In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Egypt, Nigeria, Mongolia, and Vietnam all of which have been the subject of recent enquiries from JLT's client base.

The monthly Risk Outlook is supported by JLT’s proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data.

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